Following the housing bubble in 2008-2009 and the ensuing global financial crisis, house prices are beginning to show a discernible upward trend worldwide. Although financing remains a challenge, especially in Europe where debt liquidity continues to hinder growth, in developing markets, it generally appears that the market has stabilized and activities in the sector are returning to normal. However, post crisis, global markets are giving increased attention to local market conditions and regulations when evaluating the real estate sector’s growth prospects.
Currently, Nigeria is in the midst of a housing boom, primarily due to the great demand created by a rising population. Nigeria’s housing deficit is estimated to be 17 million as of August 2012. Yet demand is characterised by high inequality, creating a dichotomy between the demand for luxury secure accommodation for high-income earners, and low-cost, affordable housing for the masses. In Nigeria’s urban centres, particularly Lagos, Abuja and Port Harcourt, recent years have seen a hike in housing prices on a scale that is rarely seen in developing cities. Globally, the highest real estate price rises over the last decade have been recorded in nations such as India, which saw prices rise 284% between 2001 and 2011, and Russia, which saw an increase of 209% in the same period Lagos, it is estimated that house prices rose by 400-500% between 1998 and 2008.
Land area is the main supply constraint; secure areas that are close to central business districts (CBD) and offices are limited. Yet as the upper class grows richer and foreign investment and increased development aid brings foreign construction and aid workers, demand is perceived to be growing. Pressure for affordable housing in high demand areas has been released, allowing prices to skyrocket. The private sector is capitalising on this, with many choosing to invest in high-end property. However, many new houses sit unoccupied in these areas, giving rise to speculation as to whether this is simply a house price bubble that will soon burst.
Demand for housing is simultaneously rising further down Nigeria’s income spectrum; a growing number of middle class young professional Nigerians have jobs in city centres. This represents the majority of city workers in white-collar jobs. Their salaries are well above the Nigerian average, yet there is no source of housing nearby that they can afford to rent, let alone buy. Adding to Nigeria’s 17million housing deficit, it is estimated that an additional 700,000 houses must be built annually to keep up with demand; currently this is below 100,000. There are three main constraints to growth from the bottom. First is access to finance, primarily in mortgages for individuals who need to borrow in order to purchase owned dwellings. Second is the ease of legal procedures surrounding property and land procurement.
As of 2013, the World Bank’s “Doing Business” project ranks Nigeria 185 of 189 countries) for the ease by which property is registered. In a survey of Nigerians in 2012, the second greatest challenge facing 22% of those that want to invest in real estate was reported to be difficulty in obtaining titles. This is followed by 18% that cite cost and time foreclosing on a mortgaged property. This lack of understanding of the laws and procedures surrounding real estate combined with the debts that individuals must incur, means that investing in real estate can be high risk for low earners.
The third challenge is in access to cheap and high quality building materials. In Nigeria, the cost of building a house is high, which in turn gets passed onto the consumer in the rental and real estate markets. The estimated cost of building a house in Nigeria is $50,000, in South Africa this is $36,000, and just $26,000 in India. Poor infrastructure inflates the price of transporting and producing goods, and a shortage of skilled labour means that training must be conducted prior to building, an additional cost which is often incurred by the construction company (WB 2013:5).
Although there are clear supply side constraints, these can be overcome as the sector grows. The high demand for real estate shows no sign of abating, and represents a great opportunity for expansion of the sector, particularly in low-end housing. Recent survey data has provided evidence of this already happening. Benefits of an expanding real estate sector include an increased demand for skilled labour, permanent jobs, and downstream benefits in the construction sector. This is not to mention the social benefits citizens have from increased access to housing.
This article is an excerpt from Nigerian Real Estate Sector Summary Report (2010-2012) by the NATIONAL BUREAU OF STATISTICS released February 2015.